The asking price for the property is $1,330,000; rents are estimated at $170,240 during the first year and are expected to grow at 2.5 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 6 percent interest for 30 years (total annual payments will be monthly payments 12). The property is expected to appreciate in value at 2 percent per year and is expected to be owned for five years and then sold.

The building represents 85 percent of value and would be depreciated over 39 years (use 1/39 per year, except year 1 depreciation is also multiplied by 11.5 / 12 to adjust for the mid month convention). The potential investor indicates that she is in the 37 percent tax bracket. Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent.

What is the property's terminal capitalization rate?